Ever felt a little confused when people start talking home loan finance? This handy guide will have you up to speed and speaking lingo real quick.
Variable interest rate
Loans with variable interest will have their interest rates go up or down, in response to whatever’s happening in the market. In most cases, they have the advantage of enabling you to make as many extra repayments as you want to reduce your interest cost.
Fixed interest rate
This is when a loan’s interest has been ‘fixed’ at a rate that won’t change for an agreed length of time – no matter how much general interest rates are going up or down. Commonly though, you are restricted to be able to make extra repayments or changes to your loan. There is likely to be a break fee if you want to get out of it which can be quite high, e.g. you want to sell your house and close your loan.
Interest in advance
When interest is charged at the beginning of a period of time instead of at the end. (Only investors can do this on investment properties. It is a way of lowering their tax payments by bringing forward expenses into a tax year.)
Offset account
Also sometimes known as an ‘offset transaction facility’, this kind of account lets you reduce the interest you need to pay on a loan, by using your savings to ‘offset’ the interest.
Lenders Mortgage Insurance (LMI)
This is insurance that banks take out – at extra cost to the borrower – to protect themselves in case the borrower ends up not being able to pay what they owe. This kind of insurance is generally only needed if you’re borrowing 80% or more of the property’s value.
Redraw
If you’re ahead on your repayments, some loans let you take money back out of your loan, to use it for something else – which can be useful in an emergency….or a new car or extension. (Of course, that adds to the amount left owing on your loan, which you will have to pay back.)
Additional repayments
Some loans let you make extra repayments above what you’re required to which are mostly variable ones, so that you can reduce the amount you owe earlier. Handy method for reducing the amount of interest you need to pay over the life of the loan.
Interest-only loan
A loan that lets you make lower repayments for a certain amount of time, by having you only pay the interest on the loan, rather than having to get on with paying the whole loan back. You will have to pay back the loan later in a shorter period of time, so the repayments then will be higher. (This tends to be useful if this is an investment property – if you’re in it for the long haul, it will end up costing you more.)
Rate lock
When you apply for a fixed rate home loan, you will receive the fixed rate that applies at the time your loan is settled. This might be different to what the fixed rate was when you applied. To lock in the rate you had before settlement, you can purchase rate lock. At settlement you will get the better of the two rates.
Loan Value Ratio (LVR)
This value compares the amount you have owing on your loan against the actual value of your property. For example, if your property was valued at $400,000 and your loan amount was $340,000, your LVR would be 85%.
Top-up
A simple way to borrow extra money – for a holiday, a renovation, a new car or anything else you might need – by increasing what you owe on your existing home loan.
Refinance
This means closing down one home loan and creating a new one – the new loan pays off the old loan, effectively rolling the debt into a new loan. Refinancing can be used to move a loan to a different bank.
repayment holiday/ If you’re ahead on your loan repayments, some loans let you apply to take a break from making repayments for a while, e.g. for a new baby or career break.
Split home loan
This is when you split a home loan into different accounts, each with their own separate arrangements. People often do this so that they can set one part of a loan to a fixed interest rate, and the other part to the variable rate.
Disclaimer
This information is current as at 21/12/16 This article has been prepared by Heart1Stop, a social media brand owned by Heart Mortgage Services and Heart Financial Advisers. The information contained in this article is an overview or summary only and it should not be considered a comprehensive statement on any matter nor relied upon as such. The views expressed here are not those of Heart1stop, Heart Mortgage Services, Heart Financial Advisers, shareholders, directors or staff and associated contractors and business associates. This article has been prepared without taking into account any person’s objectives, financial situation or needs. Because of this, you should, before acting on any information contained in this article, consider its appropriateness, having regard to your objectives, financial situation or needs. Any taxation information contained in this article is a general statement and should only be used as a guide. It does not constitute taxation advice and is based on current laws and their interpretation. Each individual’s situation may differ, and you should seek independent professional taxation advice on any taxation matters. While the information contained in this article may contain or be based on information obtained from sources believed to be reliable, it may not have been independently verified. Where information contained in this publication contains material provided directly by third parties it is given in good faith and has been derived from sources believed to be accurate at its issue date. It is not the intention of Heart1Stop or Heart Mortgage Services and Heart Financial Advisers that this publication be used as the primary source of readers’ information but as an adjunct to their own resources and training. To the maximum extent permitted by law: no guarantee, representation or warranty is given that any information or advice in this publication is complete, accurate, up to date or fit for any purpose; and no party of Heart1Stop or associated entities as mentioned is in any way liable to you (including for negligence) in respect of any reliance upon such information. This article may also contain links to websites operated by third parties ("Third Parties") who are not related to Heart1Stop. These links are provided for convenience only and do not represent any endorsement or approval by us.
